Question

Holly Springs, Inc. contracted with Coldwater Corporation to have constructed a custom-made lathe. The machine was completed and ready for use on January 1, 2018. Holly Springs paid for the lathe by issuing a $220,000 note due in three years. Interest, specified at 2%, was payable annually on December 31 of each year. The cash market price of the lathe was unknown. It was determined by comparison with similar transactions for which 6% was a reasonable rate of interest. Holly Springs uses the effective interest method of amortization. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Round your intermediate and final answers to the nearest whole dollar.) Required: 1. Prepare the journal entry on January 1, 2018, for Holly Springs’ purchase of the lathe. 2. Prepare an amortization schedule for the three-year term of the note. 3. Prepare the journal entries to record (a) interest for each of the three years and (b) payment of the note at maturity.

Answer 1

ANSWER:-

1.

Face Value of Note = $220,000

Annual Interest Rate = 2%
Annual Interest = 2% * $220,000
Annual Interest =$4,400

Period = 3 years
Annual Market Interest Rate = 6%

Present Value of Note = $4,400 * PVA of $1 (6%, 3) + $220,000 * PV of $1 (6%, 3)
Present Value of Note = $4,400 * 2.6730 + $220,000 * 0.8396
Present Value of Note = $196,473

Date	General Journal	Debit	Credit
Jan.01.2018	Machinery Discount on Notes Payable	196,473 23,520	219,993

2.

  

Date	Cash Payment	Interest Expense	Discount Amortization	Carrying Value
Jan.01,2018				$196,473
Dec.31,2018	$4,400	$11,788	$7,388	$203,861
Dec.31,2019	$4,400	$12,231	$7,831	$211,692
Dec.31,2019	$4,400	$12,701	$8,30	$219,993

3.

Date	General Journal	Debit	Credit
Dec.31,2018	Interest Expense Discount on Note Payable Cash	11,788	7,388 4,400
Dec.31,2019	Interest Expense Discount on Notes Payable Cash	12,231
Dec 31,2020	Interest Expense Discount on Notes Payable Cash	12,701
Dec 31,2020	Notes Payable Cash	219,993	291,993

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